Deductions for the decline in value of depreciating assets and certain other capital expenditure

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A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Some assets are specifically excluded from the definition.

Depreciating assets generally

There is a set of general rules for working out deductions for the decline in value of depreciating assets.

The decline in value of a depreciating asset starts when you first use it, or install it ready for use, for any purpose, including a private purpose. This is known as a depreciating asset’s start time. Although an asset is treated as declining in value from its start time, a deduction for its decline in value is only allowable to the extent it is used for a taxable purpose. Your deduction for the decline in value is reduced to the extent that your use of the asset is for a non-taxable purpose. A taxable purpose includes the purpose of producing assessable income.

Generally, you work out the decline in value of a depreciating asset using either the prime cost or the diminishing value method. Both methods are based on the effective life of an asset. The Decline in value calculator will help you with the choice and the calculations. For most depreciating assets, you choose whether to self-assess the effective life or use the Commissioner’s determination that is in Taxation Ruling 2015/2Income tax: effective life of depreciating assets (applicable from 1 July 2015). You can allocate your low-cost assets and low-value assets to a low-value pool and work out the decline in value of all the assets in the pool in a single calculation.

A low-cost asset is a depreciating asset whose cost at the end of the year in which you start to use it, or have it installed ready for use, is less than $1,000 (excluding input tax credit entitlements and a horticultural plant). A low-value asset is a depreciating asset that is not a low-cost asset but that has an opening adjustable value of less than $1,000, and for which you have worked out any available deductions for decline in value for a previous income year under the diminishing value method.

The adjustable value of a depreciating asset is its cost (excluding any input tax credit entitlements) less its decline in value since you first used it or installed it ready for use for any purpose, including a private purpose.

Once you choose to create a low-value pool and a low-cost asset is allocated to the pool, you must pool all other low-cost assets that you start to hold in that income year and in later income years. However, this rule does not apply to low-value assets. You can decide whether to allocate low-value assets to the pool on an asset-by-asset basis. Once you have allocated an asset to the pool, it remains in the pool.

The following depreciating assets cannot be allocated to a low-value pool:

assets for which you used the prime cost method to work out any deductions for decline in value for a previous income year

horticultural plants

assets for which you deduct amounts under the simplified depreciation rules

assets that cost $300 or less for which you can claim an immediate deduction

certain depreciating assets used in carrying on research and development activities.

These rules for working out the decline in value apply to most depreciating assets used in primary production. However, there are special rules for working out deductions for the decline in value of some primary production depreciating assets and certain other capital expenditure.

Water facilities

A water facility includes plant or a structural improvement, or an alteration, addition or extension to plant or a structural improvement, that is primarily and principally for the purpose of conserving or conveying water. Examples of a water facility are dams, tanks, tank stands, bores, wells, irrigation channels, pipes, pumps, water towers and windmills.

‘Water facility’ also includes certain other expenditure incurred on or after 1 July 2004:

a repair of a capital nature to plant or a structural improvement that is primarily and principally for the purpose of conserving or conveying water. For example, if you purchase a pump that needs substantial work done to it before it can be used in your business, the cost of repairing the pump may be treated as a water facility

a structural improvement, or an alteration, addition or extension, to a structural improvement, that is reasonably incidental to conserving or conveying water

a repair of a capital nature to a structural improvement that is reasonably incidental to conserving or conveying water.

Examples of structural improvements that are reasonably incidental to conserving or conveying water include a bridge over an irrigation channel, a culvert (a length of pipe or multiple pipes that are laid under a road to allow the flow of water in a channel to pass under the road) and a fence preventing livestock entering an irrigation channel.

The expenditure on the water facility must be incurred by you primarily and principally for conserving or conveying water for use in your primary production business on land in Australia. You may claim the deduction even if you are only a lessee of the land.

If you incurred the expenditure before 7.30pm (AEST), 12 May 2015 you can claim a deduction for the decline in value of a water facility in equal instalments over three income years. If you incurred the expenditure on or after this time, you claim the full amount in the year you incurred it.

Your deduction is reduced where the water facility is not wholly used for either:

carrying on a primary production business on land in Australia, or

a taxable purpose, for example, for producing assessable income.

No deduction is available for capital expenditure incurred to acquire a second-hand commercial water facility unless you can show that no-one else has deducted or could deduct an amount for earlier capital expenditure on the construction or previous acquisition of the water facility.

These deductions are not available to a partnership. Costs incurred by a partnership for facilities to conserve or convey water are allocated to each partner who can then claim the relevant deduction for their share of the expenditure.

Any recoupment of the expenditure may be included in your assessable income. If the expenditure on water facilities is deductible over three income years, special rules apply to determine the amount of any recoupment to be included in assessable income in the year of recoupment and in later income years.

Irrigation water providers are entitled to a deduction for expenditure on water facilities that is incurred on or after 1 July 2004. An irrigation water provider is an entity whose business is primarily and principally the supply (by means other than by the use of motor vehicles) of water to entities, for use in primary production businesses on land in Australia.

If you are a small business entity, you can choose to work out your deductions for water facilities under these UCA rules or the simplified depreciation rules. Once you have made your choice, you cannot change it.

Tradeable water rights

The states and territories have enacted legislation to enable the trading of water rights. Generally, there are capital gains tax (CGT) and/or general taxation consequences from the sale, transfer or ending of water licences, allocations, quotas and entitlements.

Water rights, such as licences and water allocations, are CGT assets. The permanent trade of a water right constitutes the disposal of a CGT asset. A temporary trade of a water right also constitutes a CGT event, exactly which CGT event will depend on the facts of each case and the rules governing the trade. Whether there are general income tax consequences as a result of trading a water right also depends on your particular circumstances. If you are uncertain, write to us and request a private ruling on how the tax laws apply to your situation.

Fencing assets

A fencing asset is a fence, and includes a structural improvement, a repair of a capital nature, or an alteration, addition or extension, to a fence. The expenditure must be incurred by you on the construction, manufacture, installation or acquisition of a fencing asset that is used primarily and principally in a primary production business you conduct on land in Australia. You may claim the deduction even if you are only a lessee of the land.

If you incurred the expenditure on or after 7.30pm (AEST), 12 May 2015 you claim the full amount in the year you incurred it. If you incurred the expenditure before this time (or if the expenditure relates to a stockyard, pen or portable fence), the previous UCA rules that apply to fences continue to apply.

Your deduction is reduced where the fencing asset is not wholly used for either:

carrying on a primary production business on land in Australia, or

a taxable purpose, for example, for producing assessable income.

No deduction is available for capital expenditure incurred to acquire a second-hand fencing asset unless you can show that no-one else has deducted or could deduct an amount for earlier capital expenditure on the construction or previous acquisition of the fencing asset under these rules.

These deductions are not available to a partnership. Costs incurred by a partnership on fencing assets are allocated to each partner who can then claim the relevant deduction for their share of the expenditure.

If you are a small business entity, you can choose to work out your deductions for fencing assets under these UCA rules or the simplified depreciation rules. Once you have made your choice, you cannot change it.

Fodder storage assets

A fodder storage asset is an asset that is primarily and principally for the purpose of storing fodder. It includes a structural improvement, a repair of a capital nature, or an alteration, addition or extension, to an asset or structural improvement, that is primarily and principally for the purpose of storing fodder.

The expenditure must be incurred by you on the construction, manufacture, installation or acquisition of the fodder storage asset that is used primarily and principally in a primary production business you conduct on land in Australia. You may claim the deduction even if you are only a lessee of the land.

The term 'fodder' refers to food for livestock, usually but not exclusively dried, such as grain, hay or silage. Fodder can include liquid feed and supplements. Examples of fodder storage assets include silos, tanks, bins, sheds and above ground bunkers used to store grain and other animal feed.

If you incurred the expenditure on or after from 7.30pm (AEST), 12 May 2015 you can claim a deduction for the decline in value of a fodder storage asset in equal instalments over three income years. If you incurred the expenditure before this time, the previous UCA rules that apply to fodder storage assets continue to apply.

Your deduction is reduced where the fodder storage asset is not wholly used for either:

carrying on a primary production business on land in Australia, or

a taxable purpose, for example, for producing assessable income.

No deduction is available for capital expenditure incurred to acquire a second-hand fodder storage asset unless you can show that no-one else has deducted or could deduct an amount for earlier capital expenditure on the construction or manufacture of the asset or previous acquisition of the fodder storage asset under these rules.

These deductions are not available to a partnership. Costs incurred by a partnership on fodder storage assets are allocated to each partner who can then claim the relevant deduction for their share of the expenditure.

If you are a small business entity, you can choose to work out your deductions for fodder storage assets under these UCA rules or the simplified depreciation rules. Once you have made your choice, you cannot change it.

Horticultural plants

A horticultural plant is a live plant or fungus that is cultivated or propagated for any of its products or parts.

You can claim a deduction for the decline in value of horticultural plants, provided:

you own the plants; lessees and licensees of land are treated as if they own the horticultural plants on that land

you use the plants in a business of horticulture to produce assessable income

the expense was incurred after 9 May 1995.

Your deduction for the decline in value of horticultural plants is based on the capital expenditure incurred in establishing the plants. This does not include the cost of purchasing or leasing land, or expenditure on draining swamp or low-lying land or on clearing the land. It would include, for example:

the costs of acquiring and planting the seeds

part of the cost of ploughing, contouring, fertilising, stone removal and topsoil enhancement relating to the planting.

You cannot claim this deduction for forestry plants.

The period over which you can deduct the expenditure depends on the effective life of the horticultural plant. You can choose to work out the effective life yourself or you can use the effective life determined by the Commissioner, which is listed Taxation Ruling 2015/2Income tax: effective life of depreciating assets (applicable from 1 July 2015).

If the effective life of the plant is less than three years, you can claim the establishment expenditure in full generally in the year in which the products or parts of the plant are first able to be harvested and sold commercially. If the effective life of the plant is three or more years you can write off the establishment costs over the maximum write-off period, which generally commences at the start of what is expected to be the plant’s first commercial season. If the plant is destroyed before the end of its effective life you are allowed a deduction in that year for the remaining unclaimed expenses less any proceeds (for example, insurance).

Plants with effective life of three or more years

Effective life

Annual write-off rate

Maximum write-off period

3 to less than 5 years

40%

2 years 183 days

5 to less than 62/3 years

27%

3 years 257 days

62/3 to less than 10 years

20%

5 years

10 to less than 13 years

17%

5 years 323 days

13 to less than 30 years

13%

7 years 253 days

30 years or more

7%

14 years 105 days

Where ownership of the horticultural plants changes, the new owner is entitled to continue claiming the balance of the capital expenditure incurred in establishing the plants on the same basis.

If you are a primary producer and a small business entity, you must use the UCA rules to work out your deductions for horticultural plants.

Grapevines

If you planted and first used a grapevine in a primary production business on or after 1 October 2004, the decline in value of the grapevine is worked out under the general rules relating to horticultural plants; see Horticultural plants.

The specific rules for working out the decline in value of grapevines only apply to grapevines you planted and first used in your primary production business before 1 October 2004.

Grapevines planted before 1 October 2004

The decline in value of grapevines is calculated at a specified rate of 25%, provided:

you own the grapevines, or

you established them on your leased Crown land that you use in a primary production business.

Capital expenditure is written off pro rata over a period of four years from the time you first use the grapevines in a primary production business to produce assessable income.

If you are not entitled to work out your deduction for the decline in value under the provisions relating to grapevines because these conditions are not met, a deduction may be available for the decline in value under the provisions relating to horticultural plants.

Grapevines planted on or after 1 October 2004

If a grapevine was planted and first used by you in a primary production business on or after 1 October 2004, the decline in value of the grapevine is worked out under the provisions relating to horticultural plants.

Under these provisions, deductions for the decline in value of a grapevine planted on or after 1 October 2004 can only be claimed from the income year in which the grapevine’s first commercial season starts, not when it is first used in a primary production business.

The decline in value of a grapevine will not be worked out at an annual rate of 25%, but will be based on the effective life of the grapevine.

The Commissioner has determined effective lives for grapevines as follows:

Horticultural plants

Effective life (years)

Grapevines: dried

15

Grapevines: table

15

Grapevines: wine

20

Alternatively, a taxpayer can estimate their own effective life for grapevines.

Common provisions relating to the establishment of grapevines

These provisions apply to grapevines planted and first used by you in a primary production business both before and after 1 October 2004.

Your deduction for the decline in value of grapevines is based on the capital expenditure incurred in establishing the grapevines (and horticultural plants). Capital expenditure incurred in establishing grapevines does not include the costs of:

Where ownership of the grapevines changes, the new owner is entitled to continue claiming the balance of the capital expenditure incurred in establishing the grapevines on the same basis, while they use the grapevines in a primary production business.

If a grapevine is destroyed before the end of its effective life you are allowed a deduction in that year for the remaining unclaimed expenses less any proceeds (for example, insurance).

Any recoupment of the expenditure is assessable income. Where the expenditure is deductible over more than one income year, special rules apply to determine the amount of any recoupment to be included in assessable income in the year of recoupment and later income years.

If you are a primary producer and a small business entity, you must use the UCA rules to work out your deductions for grapevines.

These deductions for primary production depreciating assets are not available to a partnership. Costs incurred by a partnership in establishing horticultural plants are allocated to each partner, who can then claim the relevant deduction for their share of the expenditure.

Landcare operations

You can claim a deduction in the year you incur capital expenditure on a landcare operation for land in Australia.

The deduction is available to the extent you use the land for either:

a primary production business, or

in the case of rural land, a business for the purpose of producing assessable income from the use of that rural land, except a business of mining or quarrying.

You may claim the deduction even if you are only a lessee of the land.

A landcare operation is one of the following operations:

erecting fences to separate different land classes in accordance with an approved land management plan

erecting fences primarily and principally to keep out animals from areas affected by land degradation in order to prevent or limit further damage and assist in reclaiming the areas

constructing a levee or similar improvement

constructing drainage works (other than the draining of swamps or low-lying land) primarily and principally to control salinity or assist in drainage control

an operation primarily and principally for eradicating or exterminating animal pests from the land

an operation primarily and principally for eradicating, exterminating or destroying plant growth detrimental to the land

an operation primarily and principally for preventing or combating land degradation other than by the use of fences

an extension, alteration or addition to any of the assets described in the first four dot points or an extension to an operation described in the fifth to seventh dot points.

A landcare operation also includes expenditure incurred on or after 1 July 2004 on:

a repair of a capital nature to an asset that is deductible under a landcare operation

constructing a structural improvement that is reasonably incidental to levees or drainage works deductible under a landcare operation

a repair of a capital nature, or an alteration, addition or extension to a structural improvement that is reasonably incidental to levees (or similar improvements) or drainage works deductible under a landcare operation.

An example of a structural improvement that may be reasonably incidental to drainage works is a fence constructed to prevent livestock entering a drain that was constructed to control salinity.

No deduction is available for capital expenditure on plant, except for plant comprising certain fences, dams or other structural improvements. If the decline in value of plant is not deductible under the landcare provisions, you work out the plant’s decline in value using the general rules for working out a decline in value.

Where a levee is constructed primarily and principally for water conservation before 7.30pm 12 May 2015, it is a water facility and no deduction would be allowable under these rules. Its decline in value would need to be worked out under the rules for water facilities.

If you can deduct expenditure under both the carbon sink forests and landcare operation rules, you can only deduct the expenditure as expenditure on carbon sink forests.

Any recoupment of the expenditure may be included in your assessable income.

These deductions are not available to a partnership. Expenses for landcare operations incurred by a partnership are allocated to each partner who can then claim the relevant deduction in respect of their share of the expenditure.

Rural land irrigation water providers can claim a deduction for certain expenditure that they incur for a landcare operation. A rural land irrigation water provider is an entity whose business is primarily and principally supplying water to entities for use in primary production businesses on land in Australia or businesses (except mining or quarrying businesses) using rural land in Australia.

If you are a small business entity, you can choose to work out your deductions for relevant depreciating assets relating to landcare operations under the UCA rules or the simplified depreciation rules. Once you have made the choice, it cannot be changed.

Electricity connections and telephone lines

You may be able to claim a deduction over 10 years for capital expenditure you incur on:

connecting mains electricity to land on which a business is carried on for a taxable purpose or upgrading an existing connection to that land, or

installing a telephone line on, or extending to, land on which a primary production business is undertaken.

A recoupment of the deductible expenditure may be included in your assessable income. As the expenditure is deductible over more than one income year, special rules apply to determine the amount of any recoupment to be included in assessable income in the year of recoupment and in later income years.

These deductions are not available to a partnership. Costs incurred by a partnership on connecting mains electricity or installing telephone lines are allocated to each partner, who can then claim the relevant deduction for their share of the expenditure.

If you are a primary producer and a small business entity, you can choose to work out your deductions for relevant depreciating assets relating to electricity connections or telephone lines under the UCA rules or the simplified depreciation rules. Once you have made the choice, it cannot be changed.

Carbon sequestration rights

Farmers and other landowners may manage or plant forests to participate in carbon sequestration activities. The carbon sequestration activities that contribute to greenhouse gas abatement are enabled by state legislation, and are governed by rules under relevant state legislation, related regulations and operating rules.

A carbon sequestration right is a CGT asset. There are CGT consequences of trading in carbon sequestration rights, which will depend on the facts and the manner in which your trade is carried out. For example, selling a carbon sequestration right to another entity before the end of a contract will trigger a CGT event as the sale will result in a change of ownership. A carbon sequestration right, as defined in NSW legislation, is considered to be inherently connected with a primary producer’s land and can be an active asset. Therefore any capital gain made by a primary producer from the granting of that right may qualify for the small business concessions if the conditions for those concessions are satisfied.

You are not a primary producer if you plant, manage or establish trees for the sole purpose of carbon sequestration activities and those trees are not intended to be felled in a business of forestry operations; see Who is a primary producer?

Where you plant and maintain forests in the ordinary course of forestry activities, you may be entitled to a general deduction for the costs of planting and maintaining the forests. You are a primary producer for income tax purposes if you are engaged in ‘forest operations’ and those activities constitute the carrying on of a business. Taxation Ruling TR 95/6– Income tax: primary production and forestry outlines the various deductions available to primary producers engaged in forest operations. The deductibility of these expenses is not altered by the fact that you also derive income from carbon sequestration activities carried on in conjunction with forestry activities.

A general deduction is not allowed for the costs of planting trees if the sole purpose is participating in carbon sequestration activities and those trees are not intended to be felled in a business of forestry. This is because the cost of planting in these circumstances is capital expenditure.

Capital expenditure for planting trees may receive other income tax treatment, depending on the context in which the expenditure is incurred:

For trees that are regarded as horticultural plants (that is, trees used for the sale of their products or parts), the costs of establishment are written off by reference to the effective life of the plant. Trees that are used solely for carbon credit arrangements are not cultivated or propagated for any of their products or parts and do not constitute horticultural plants for the purpose of applying the horticultural plant deduction under section 40-515 of the Income Tax Assessment Act 1997.

For trees in a carbon sink forest, a deduction in certain circumstances is available for expenditure that you incur in planting or establishing trees primarily and principally for the purpose of carbon sequestration. For trees in a carbon sink forest established in the 2013 and later income years, you can claim a maximum capital write-off of 7% of the expenditure incurred in establishing the trees (conditions apply). For more information, see Carbon sink forests.

For trees planted or established as a landcare operation (for example, to combat land degradation), an immediate deduction for establishment costs is available where the costs are incurred primarily and principally for such a landcare purpose. See Landcare operations.

For trees and shrubs whose function is purely ornamental, capital expenditure may be deductible under the project pooling provisions, based on the project life. For more information, see Guide to depreciating assets 2016.

The UCA provisions do not otherwise provide a deduction for capital expenditure for planting or establishing trees, or treat the trees as depreciating assets.

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